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Baystar Confirms Microsoft-SCO Connection

BayStar Capital, which invested $50 million in SCO last October, said that Microsoft merely introduced BayStar to SCO and neither participated in that investment nor is an investor in BayStar.
BayStar Capital, which invested $50 million in The SCO Group last October, on Thursday confirmed that Microsoft introduced it to the small software company that has mounted a court challenge to Linux, the open-source operating system that has become a strong rival to Windows.

While confirming the introduction, a spokesman for the Larkspur, Calif., investment firm reiterated earlier statements that Microsoft did not invest any money in Lindon, Utah-based SCO.

"Microsoft did introduce SCO to BayStar as a possible investment opportunity," the spokesman said. "But, and we said this previously, Microsoft neither participated in the SCO investment back in October, nor is Microsoft an investor in BayStar."

The spokesman declined to disclose further details but said it was not unusual for companies to recommend investments in other businesses. BayStar last year funneled a majority of its investments in life sciences, media and high-tech companies.

Speculation that Microsoft was bankrolling SCO surfaced last week when Eric Raymond, president of the Open Source Initiative, published a leaked internal e-mail thread between Chris Sontag, a senior vice president and general manager of SCO's licensing division, and Mike Anderer, chief executive of Salt Lake City-based strategic consulting firm S2.

In the exchange, which occurred just days before the BayStar investment, Anderer offhandedly claimed that Microsoft had given SCO more than $82 million through various investment vehicles and was willing to put up more. SCO denied the claims, saying Anderer was misinformed. SCO and Microsoft have denied having any investment relationship.

Linux proponents have long speculated that Microsoft is secretly funding SCO's $5 billion lawsuit against IBM and Linux. The suit claims IBM inserted SCO's Unix code into Linux and then distributed it for free under the General Public License governing the use of Linux. IBM denies the allegations.

As a result, SCO is seeking licensing fees for Linux, and filed its first user suit against Memphis, Tenn.-based AutoZone last week.

To date, SCO's legal challenges have failed to bring much financial gain. The company reported a net loss of $2.3 million in the first quarter ended Jan. 31 on declining revenues of $11.4 million. Only $20,000 came from its Linux licensing initiative.

While there is no evidence Microsoft is bankrolling SCO's legal battles, there's little doubt as to Linux's growing strength in the market for servers, which are computers used to run business software.

Unit shipments of Linux servers increased 52.5 percent in the fourth quarter of 2003 compared with the same period the prior year, and revenue from the operating system jumped 63.1 percent to $960 million, according to International Data Corp. Unit shipments and revenue from Windows servers also increased.

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